of past gold bull markets have compelled us to warn investors about
the suddenness and sharpness of corrections that were likely to occur
from time to time in gold and gold stocks. As an example: in the 1970’s
gold bull market when gold rose from $35 an ounce to $850 an ounce in
1980, there were many scary and deep setbacks along the way, including
a decline from a peak of $200 an ounce in 1975 to $103 an ounce in 1976.
We have been anticipating the possibility of a violent correction such
as the one we have seen this month since November. With the XAU index
down 21.9% and HUI Gold Bugs index down 24.2% for the month, this correction
bordered on a crash. Gold was down 9.3% while silver was down 23.7%,
however, the facts that lead to our fundamental viewpoint that we are
still in the early stages of an unprecedented gold and silver bull market
The US dollar and all world currencies have been losing value over a
very long period of time, but since we totally de-linked from gold in
1971, the pace has accelerated. From 1787 to 1970 the US money supply
increased to 600 billion. Since 1971 the money supply ballooned to $6.6
trillion by 2000, a ten-fold increase! Since 2000, M3 growth accelerated
37% from $6.6 trillion to over $9 trillion, while mortgage debt is up
33%, and state and local government borrowing is up 30%. Anyone that
claims we are not experiencing rampant inflation simply does not understand
what inflation is. At the pace that M3 has grown since the beginning
of the year we will add almost $1 trillion in 2004 alone.
Meanwhile, the supply of gold from the mine production has slipped over
the past few years to less than 2600 metric tonnes, about equal with
jewelry demand for gold. Hedge buybacks accounted for 310 metric tonnes
in 2003. The really big change came from investment demand, which is
the only true real driver of a true gold bull market. Investment demand
has progressed from -47 metric tonnes in 2000, (the year the internet
bubble burst), to 156 metric tonnes in 2001, 456 metric tonnes in 2002,
and 888 metric tonnes in 2003! Silver supply from mines and scrap has
fallen short of demand since 1989, with the deficit expected to reach
46 million ounces this year. Massive inventories of the past, including
a prior 60-year stockpile of the US, is all but gone leaving little
supply to fulfill an increase in investment demand which has been climbing.
The recent action in the COMEX silver futures market suggests that we
are reaching an inflection point. Dealers in silver had losses of over
$300 million before crushing the price ahead of the April expiration.
Dealers have disappeared on the short side after escaping serious damage
over the last few months. Investors should learn from this episode to
take delivery when investing in silver as the trading rules of the COMEX
are rigged in favor of the shorts. We know of one buyer that did not
receive his silver after requesting delivery from the COMEX for well
over a month even though the price of silver dropped on the COMEX by
almost $3 per ounce. This speaks loudly to the futures market having
little connection with the real physical market. It will take some time
now for the market to recover from the technical damage that this has
caused to the metals and the precious metals stocks. A sharp rebound
should not be far off, however, as silver bulls and gold bulls have
plummeted to 9.3% and 9.9%, respectively, after exceeding 80% bullish
in recent months. One very good sign is the physical buying flooding
in from China, Japan, and India in the face of the sharp drop.
Some additional points for thought supporting
the bullish fundamentals of gold and silver:
1.) We are in a wartime environment - history supports the contention
that war and ever-increasing military expenditures strain government
budgets and result in even more rampant money printing and debt creation
2.) The Rothschild’s
have abrogated their privilege to “fix” the price of gold
in London, a privilege by some estimated to be worth a billion dollars.
Since their position has largely been a facilitator of selling forward,
doesn’t this suggest a drying up of selling, which would logically
result in their desire to get on the other side now as a buyer. This
coincides with investment demand at its highest level since 1967 at
which time the government refused to remain a seller. Again, investment
demand is the only true driver precious metal bull markets.
3.) The association
of gold and silver with the reflationary trade being over is ludicrous.
The proponents of that theory had better pray that they are wrong; however,
if in fact they are right, gold and silver will be in even more demand
as safe havens, of which there are few others. With the multiple asset
bubbles that have been created in the US by the Fed, it should be obvious
that at this point, pricking any of these bubbles would entail a dangerously
perilous risk. The lack of success Japan had with such an endeavor,
(even though they were a country that could fall back on their high
rate of savings, unlike the US) should still be fresh in our minds.
and even more so Bernanke, has pledged to continue to flood the markets
with more inflation to avoid the bursting of any bubbles, especially
the crucial housing bubble. While decades of inflationary money creation
will eventually result in a deflationary bust, as too much debt is created
to be serviced, the trend is still in force and its reversal would upset
the worldwide financial system, which is a key reason to maintain exposure
China’s announcement to slow bank lending over a few days in order
to slow what it characterized as too rapid growth, was a trial balloon
to gauge the market’s response to such an adjustment. The market
response must have struck terror into the hearts of central bankers
worldwide. They probably concluded that reeling in the world’s
bubble economy is not an option. The Fed is finally in a quandary over
what to do. Massive debts in the world magnify any policy miscalculation
it may make, as it attempts to balance pronouncements of low inflation,
growth but not too much growth, and funding requirements. A higher dollar
will exacerbate the imbalances already prevalent, as well as hit sales
and earnings of the large multinational companies in the US. A lower
dollar will encourage other nations to shift investment back to gold,
commodities, and countries other than the US.
The US economy is an $11 trillion economy, while the US stock market
is $11 trillion and the US bond market is $20 trillion. The rest of
the world’s stock market value is $15 trillion while the remainder
of the world bond market is an additional $13 trillion. With US’
appetite for debt, why is the rest of the world so willing to lend to
such a bad risk? The answer is that if they stop they are afraid what
would happen. The Bank of International Settlements estimates that total
estimated derivatives are approximately $210 TRILLION!!!
DOLLARS!!! How can this figure be ignored? A derivative is supposed
to be “derived” from something. Is it not apparent at this
point that there is nothing left big enough, (or bigger for that matter),
for derivatives to be derived from. It is obvious to me that at this
point, derivatives are nothing more than failed bets, on the part of
financial players, doubled down on many times over. The entire financial
system is Enron and Long Term Capital times ten. There is no remaining
equity to settle the unwinding of the derivatives!
When the masses realize what has happened
they will run headlong to gold and silver, and the companies that produce
them with such a fury, it will make the internet bubble look like a
high yielding utility stock by comparison.
The gold stocks that exist worldwide have roughly a market capitalization
of $100 billion while the silver stock universe is a mere $7 billion.
These are SCARCE assets that control the only REAL MONEY that will SURVIVE
what the central banks have done to the financial system. Do not be
fooled again by Rothschild’s retreat from the gold market. Remember
it was the Rothschild’s that sent a messenger to London to start
selling bonds when Napoleon was defeated in the 1800’s, which
caused a selling panic as people believed Napoleon had won. Then the
Rothschilds came in and scooped up the entire debt as they are waiting
to do with your gold and silver. Gold and silver stocks are your high-powered
leveraged play on increasing gold and silver prices over the next decade.
Understand why you own them, this most emotional of investments is likely
to experience it’s most unpredictable and volatile moments at
just such a crucial juncture as now.
gold and silver to exceed the 1980 highs of $850 and $50 per ounce in
the next few years. Before this gold and silver bull market is through,
we believe gold and silver will exceed the all-time highs in real terms.
For gold, that high was $2400 per ounce, in 1492, and for silver $806
per ounce in 1477. Just be sure to stay aboard.
Richard J. Greene CFA